What It Means
Overnight funds invest exclusively in debt securities that mature the very next working day, making them about as close to zero credit and interest-rate risk as a mutual fund gets. Liquid funds invest in debt securities with a slightly longer leash, maturing up to 91 days out, which carries marginally more risk in exchange for typically higher yield.
How It Works
Both categories are commonly used to park money you'll need soon, idle cash between investment decisions, or an emergency fund, rather than long-term investments. Liquid funds can carry a small graded exit load in the first few days after investing, while overnight funds generally don't, since there's little reason to exit one early. Neither category is meant to compete with equity funds on returns; the entire point is capital safety and easy access, not growth.